Mexican Peso bounces back on volatile day ahead of US election results

Mexican Peso pares losses against the US Dollar, as USD/MXN retreats below above 20.10 figure.
Mexican Supreme Court debates judiciary reform amid rising domestic political tensions.
US election in close race adds to Peso's depreciation as investors seek safe-haven assets.

The Mexican Peso has trimmed its earlier losses against the Greenback after posting a new record low on Tuesday as the US presidential election got underway. The Mexican Supreme Court began discussing Judge Juan Luis González Alcántara Carranca's proposal to modify the controversial judiciary reform presented by the ruling party Morena. At the same time, US business activity slowed, though it remains robust. The USD/MXN trades at 20.07, virtually unchanged.

Mexico’s economic docket is absent. Domestically speaking, investors focus on the Supreme Court decision amid an ongoing judicial crisis in the country.

Supreme Court Judge Juan Luis González Alcántara Carranca's proposal suggests that, “Contenders for the Supreme Court and other top courts would have to stand for election. But thousands of other judges, appointed based on years of training, would remain in their jobs,” via The New York Times.

President Claudia Sheinbaum refrained from discussing the court’s decision. During the same press conference, she responded to Republican candidate and former President Donald Trump about immigration, saying, “There will be a good relationship.” Sheinbaum added, “There has been a 75% decrease in migrants arriving at the northern border.”

Across the border, the US presidential election continues in a narrow race between Democratic Vice President Kamala Harris and Republican former president Trump. Trump’s campaign recognized that the election would likely not be called this afternoon, according to CNN, citing sources.

The US economic docket revealed that the Balance of Trade deficit widened, while business activity cooled slightly. S&P Global revealed that October’s service activity dipped, while the Institute for Supply Management’s (ISM) Services PMI improved for the same period.

USD/MXN traders await the Federal Reserve’s (Fed) monetary policy decision on November 6-7, in which the Fed is expected to lower borrowing costs by 25 bps. After that, Fed Chair Jerome Powell's press conference would be scrutinized by investors looking for cues on the Fed’s policy path.

Daily digest market movers: Mexican Peso consolidates on uncertainty scenario

The USD/MXN remains adrift from political turmoil in Mexico after the approval of the controversial judiciary reform.
Analysts see Mexico’s inflation moderating in October, according to Reuters.
They project the Consumer Price Index (CPI) in October at 4.73% above the prior month’s 4.58% YoY. However, core CPI is expected to decrease for the 21 straight months to 3.85% from 3.91%.
Former US President Donald Trump's harsh rhetoric weighs on the Peso. If Trump wins, a strong US Dollar could weigh on the Mexican currency, which could depreciate sharply due to threats to impose 25% tariffs on all products.
The US Bureau of Economic Analysis revealed the US trade deficit widened in September to $-84.4 billion from a revised $-70.8 billion. Economists estimated the less widened deficit of $-84.1 billion.
The US S&P Global Services PMI was 55.0 in October, below the forecast of 55.3 and September’s 55.2.
The ISM Services PMI for the same period expanded to 56, from 54.9 in September, exceeding estimates of a deceleration to 53.8.
The Federal Open Market Committee (FOMC) is expected to cut rates by 25 bps on November 7.
Data from the Chicago Board of Trade, via the December fed funds rate futures contract, shows investors estimate 49 bps of Fed easing by the end of the year.

USD/MXN technical outlook: Mexican Peso trims some losses as USD/MXN drops below 20.10

The USD/MXN reached a new yearly peak of 20.35, yet the pair has retreated below 20.20 as recent polls showed Kamala Harris up in Nevada. Despite this, the uptrend remains intact, and a break above 20.35 could open the door to challenge the 20.50 figure ahead of September. 28, 2022, high at 20.57, and the August 2, 2022, peak at 20.82.

Conversely, if USD/MXN drops further, the first support would be the 20.00 figure. Once surpassed, the next stop would be the October 24 daily low of 19.74, ahead of the 50-day Simple Moving Average (SMA) at 19.66. Once those levels are surpassed, the next support would be the October 4 cycle low of 19.10.

Risk sentiment FAQs

What do the terms"risk-on" and "risk-off" mean when referring to sentiment in financial markets?

In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.

What are the key assets to track to understand risk sentiment dynamics?

Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.

Which currencies strengthen when sentiment is "risk-on"?

The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.

Which currencies strengthen when sentiment is "risk-off"?

The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.

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